{"id":149995,"date":"2019-06-20T10:30:24","date_gmt":"2019-06-20T14:30:24","guid":{"rendered":"https:\/\/www.countingpips.com\/?p=149995"},"modified":"2019-06-20T09:05:08","modified_gmt":"2019-06-20T13:05:08","slug":"the-longer-the-us-sino-tariff-wars-go-on-the-harder-it-will-be-to-undo-the-damage","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2019\/06\/the-longer-the-us-sino-tariff-wars-go-on-the-harder-it-will-be-to-undo-the-damage\/","title":{"rendered":"The Longer the US Sino-Tariff Wars Go On, the Harder It Will Be to Undo the Damage"},"content":{"rendered":"
June 20, 2019<\/div>
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By Dan Steinbock<\/b><\/strong> \u00a0\u00a0<\/b><\/strong><\/p>\n

Compared to pre-2008 crisis levels, world economic growth has plummeted by half and is at risk of a long-term, hard-to-reverse stagnation. Returning to global integration and multilateral reconciliation could dramatically change the scenario<\/b><\/strong><\/p>\n

Since spring 2017, the US-led tariff wars have effectively undermined the global recovery. In the past years, global economy has navigated across several scenarios. Now it is approaching the edge.<\/p>\n

I have been following four generic scenarios on the prospects of global economic growth since the U.S. 2016 election. The first two scenarios represent variants of \u201crecoupling.” In these cases, global integration prevails, despite tensions. In the next two scenarios, global integration will fail, either in part and regionally or fully and globally.<\/p>\n

What should worry us all is that, during the past few years, real global growth prospects have slowly but surely moved from the ideal and preferable scenarios toward the worst and darkest.<\/p>\n

The <\/b><\/strong>Return to Cooperation<\/i><\/b><\/em><\/strong>\u00a0Scenario<\/b><\/strong><\/p>

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In this scenario, U.S. and China achieve a trade agreement. Both agree to phase out additional tariffs, renounce trade threats and establish working groups to defuse other friction areas in intellectual property rights, social and political issues, and military matters. Global growth prospects could \u2013 in the best scenario \u2013 even exceed the old OECD\/IMF baselines at more than 4%.<\/p>\n

This was always the least likely scenario to materialize. Today, its degree of probability is minimal. Yet, it is important to remember that, during the first Trump-Xi meeting, many\u00a0observers saw the scenario still as possible, even\u00a0probable.<\/p>\n

The <\/b><\/strong>Muddling Through<\/i><\/b><\/em><\/strong>\u00a0Scenario<\/b><\/strong><\/p>\n

In this\u00a0scenario,\u00a0the tariff\u2019s economic impact would have been limited to 0.4% of Chinese GDP and 0.8% of U.S. GDP, respectively. U.S. and China develop a path to a trade agreement during the truce, but other friction areas, \u2013 particularly in advanced technology, result in new skirmishes.<\/p>\n

Uncertainty decreases but fluctuates. Global economic prospects barely improve. Markets witness rallies and plunges. Global recovery fails. Global growth prospects\u00a0remain close to 3.5%-3.9%.<\/p>\n

Only half a year ago, this scenario was still seen as a viable one. Today, it feels like a bygone world.<\/p>\n

The <\/b><\/strong>America First<\/i><\/b><\/em><\/strong>\u00a0Scenario<\/b><\/strong><\/p>\n

In this scenario, the import-value stakes would be 10-fold relative to the start of the trade war, amounting\u00a0to more than $0.5 trillion, with soaring collateral damage.\u00a0In China, it could shave off 0.4%\u00a0and in the U.S., 0.8%\u00a0of the 2019 GDP, respectively. Neither the U.S. nor China would agree to phase out additional tariffs.\u00a0Talks would linger, fail or lead to new friction. Uncertainty increases, volatility returns. Global prospects decline further. Markets linger.<\/p>\n

In this scenario, global prospects would dampen as world GDP growth in 2019 would sink to 3% or worse.<\/p>\n

The <\/b><\/strong>Global Trade War<\/i><\/b><\/em><\/strong>\u00a0Scenario<\/b><\/strong><\/p>\n

In this scenario, all bets are off. U.S. and China fail to agree on a trade compromise. Additional tariffs are enacted\u00a0and new trade threats declared. The White House escalates attacks against Chinese industries, in intellectual property rights, social and political issues, and military modernization. Volatility soars. Real GDP growth in the U.S. takes a severe hit. Chinese growth erodes.<\/p>\n

Eventually, risks to global outlook overshadow world GDP growth, which could linger at 2%-2.5% or worse. World trade and investment plunges. Migration crises abound. The number of globally displaced, which has exceeded World War II figures since the mid-2010s, soars to record highs. A series of new geopolitical conflicts prove harder to contain.<\/p>\n

Toward the Edge<\/b><\/strong><\/p>\n

So where are we today vis-\u00e0-vis these scenarios? A simple answer: Moving closer to the edge.<\/p>\n

After trade frictions and the Trump tariffs undermined the global recovery momentum, the IMF finally woke up predicting global economic activity to slow notably. In early June, the World Bank estimated the world economy would only expand by 2.6%. The IMF has affirmed that the trade wars could wipe $455 billion off global GDP in 2020.<\/p>\n

Worse, President Trump increased tariffs on $200 billion worth of Chinese goods exported to the U.S., and introduced an effective ban on American companies doing business with Chinese telecom giant Huawei in early May.<\/p>\n

In brief, the status quo is shifting from the America First<\/i><\/em>\u00a0toward the Global Trade War<\/i><\/em>\u00a0scenario (see the red line in the Figure<\/b><\/strong>).<\/p>\n

Figure <\/b><\/strong>\u00a0<\/b><\/strong> Trade War Scenarios: Risks to Global Economic Outlook<\/b><\/strong><\/p>\n

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Sources: Difference Group (WEO\/IMF growth data)<\/i><\/em><\/p>\n

In effect, multilateral banks\u2019 estimates still downplay effective collateral damage. If the Trump administration will continue to expand trade wars and geopolitical ploys in multiple regions, their models ignore the impending adverse feedback of such measures – as evidenced by Morgan Stanley\u2019s business conditions index that just took the worst one-month hit in its history.<\/p>\n

To understand how much expectations have been revised, let\u2019s recall that before the 2008 global crisis global growth rate was around 4% to 4.3%. The current growth rate has almost halved<\/i><\/em>\u00a0from its pre-crisis level.<\/p>\n

In relative terms, something similar occurred in the 1970s, which saw the end of three \u201cglorious decades\u201d of solid growth in major advanced economies.<\/p>\n

What we are witnessing now is a potentially fatal fall into secular stagnation. In part, it is structural, resulting from maturing economies and aging populations. But in part, it is self-induced and the effect of misguided trade policies and unilateral geopolitical aggression. In the absence of tariff wars and geopolitical destabilization, global growth rate could<\/i><\/em>\u00a0now be closer to 3.5%.<\/p>\n

The longer it takes to achieve multilateral reconciliation, the more likely it is that falling secular long-term<\/i><\/em>\u00a0growth rates will prove harder to reverse.<\/p>\n

About the Author:<\/i><\/em><\/strong><\/p>\n

Dr. Dan Steinbock is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see <\/i><\/em>http:\/\/www.differencegroup.net\/<\/i><\/u><\/em><\/a>\u00a0\u00a0<\/i><\/em><\/p>\n

The original version was published by South China Morning Post<\/i><\/em>\u00a0on June 20, 2019<\/p>\n

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By Dan Steinbock \u00a0\u00a0 Compared to pre-2008 crisis levels, world economic growth has plummeted by half and is at risk of a long-term, hard-to-reverse stagnation. Returning to global integration and multilateral reconciliation could dramatically change the scenario Since spring 2017, the US-led tariff wars have effectively undermined the global recovery. In the past years, global […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-149995","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/149995","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=149995"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/149995\/revisions"}],"predecessor-version":[{"id":149997,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/149995\/revisions\/149997"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=149995"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=149995"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=149995"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}